Twitter's surge revives valuation debate

New York, July 31, 2014

By Supantha Mukherjee

The surge in Twitter's stock has revived debate about whether it warrants a valuation five times that of Facebook, its biggest rival in social media.

Twitter reported on Tuesday that its active users jumped 24 percent to 271 million in the second quarter. That pales when compared with Facebook's 1.3 billion.

Even so, Twitter's shares were trading at about 200 times forward earnings on Wednesday, against Facebook's 39.4 times, according to Thomson Reuters StarMine. If Facebook was trading at Twitter's valuation, it would be worth nearly $1 trillion.

Twitter's shares finished almost 20 percent higher at $46.30, giving the company a market value of about $27.3 billion. The stock notched its biggest single-day gain since going public in November, and its third-biggest daily volume with almost 116 million shares changing hands.

Active users of Twitter increased more than expected in the quarter as the micro-messaging service introduced product tweaks and services, many built around the soccer World Cup.

Advertising revenue more than doubled to $277 million in the three months ended June 30.

The results were good, Pivotal Research Group analyst Brian Weiser wrote in a research report, but they did not warrant a nearly 30 percent rise in the stock price.

Weiser joined the few analysts who have a "sell" rating on the stock, cutting his recommendation from "hold."

At least five brokerages raised their ratings on the stock, while at least 21 raised price targets, by as much as $18 to a high of $65.

StarMine data on Wednesday showed that of 34 analysts covering the stock, 13 have a "buy" or a higher rating, 16 have a "hold" and five have a "sell" or equivalent rating.

Just about 12 percent of the shares available to be lent out were being borrowed for short bets as of Tuesday, according to Markit data, a relatively low amount for a high-growth momentum name such as Twitter.

SUPER PREMIUM

Analysts at RBC Capital Markets were among those saying that Twitter deserved its high valuation.

"On valuation, yes, (Twitter) is the highest multiple stock we cover," the analysts wrote. "But it also has the highest growth rates, too. So we view (the) super-premium multiples as well-warranted."

Goldman Sachs and others cited Twitter's potential to make more money from its platform and extend its real-time information edge into traditional media.

"We continue to believe we are in the early stages of a very long growth cycle for Twitter as it leverages cultural ubiquity, invests in product and technology, and grows the platform," Goldman Sachs analysts wrote.

Goldman maintained its "buy" rating and raised its price target to $63 from $52.

Twitter's user growth stagnated after it went public to much fanfare in November, leading to a management shake-up that resulted in the departure of Chief Operating Officer Ali Rowghani.

"This quarter's results take away one of the major bear arguments for the stock, namely that the user base is small and maturing," Janney Capital Markets analysts said in a report.

Up to Tuesday's close, Twitter had lost nearly half of its market value since its shares hit a record high of $74.73 in December. The stock went public at $26 per share. - Reuters